MADRID, Feb 1 Spain took steps on Friday to cap
the government's growing debt to the energy sector, including
ending a link between power tariffs and the consumer price index
and restricting pricing options for renewable firms.

The overhaul will save the power sector 600 million to 800
million euros ($821.8 million-$1.1 billion) in annual regulated
charges, which account for about half of Spanish electricity
bills, Industry Minister Jose Manuel Soria said at a news
conference.

The measures are meant to mend a partially regulated power
system that has led to a so-called tariff deficit of nearly 28
billion euros ($38 billion), built up over years of keeping
prices from rising in line with costs.

As part of the reform, renewable energy companies will be
forced to choose between two pricing options, removing previous
flexibility and potentially hurting future revenues.

Shares in renewable energy firms Acciona and
Abengoa, seen as the hardest hit from the measures,
fell sharply on Friday, closing down 13 percent and 5 percent
respectively in Madrid trade.

Analysts said it was too soon to judge the final impact of
the measures on these companies' profits.

Riding on the back of government subsidies, wind and solar
projects flourished during Spain's economic boom years, driving
the country to become one of the biggest markets for investments
in green energy.

That position has since fallen, reflecting Spain's economic
crisis and previous steps to cut the tariff deficit including a
halt on subsidies to new projects, which have caused investment
returns to slump about 30 percent according to some estimates.

In an effort to soothe some of the sector's pain, the
industry ministry announced a 2.2 billion euro emergency loan to
help cover any shortfall in the power market this year.

Spanish wind power association AEE said on Friday it would
take legal action against the measures.

CONSUMER RELIEF

Successive administrations have struggled to strike a
balance in sharing out the power deficit burden between
consumers, companies and the government itself.

Last year Soria announced a levy on power generation, which
analysts have said utilities such as Iberdrola, Endesa
and Gas Natural Fenosa would mostly be able to
pass through to consumers.

Part of the deficit has also been securitised through a
state-backed bond plan known as FADE, but high borrowing costs
have made the programme very costly and it has faltered.

Spain sits in the epicentre of the euro zone debt crisis
because of a large public deficit and sagging economy that has
been in recession or stagnation for five years, leaving one
person in four of the workforce unemployed.

Cash-strapped consumers have already seen their electricity
bills spike over the past year, even as private and industrial
demand has plummeted.

"Higher costs and lower demand make urgent measures
necessary to avoid a rise in transmission rates that will affect
electricity bills," Soria said.

"Our goal is for there to be zero deficit," he added.

The reform will also index regulated charges by power
transmitting and distributing companies to core inflation rather
than the consumer price index.

This measure cuts the underlying costs that utilities have
to cover with the tariffs and also will save consumers an
estimated annual 330 million to 340 million euros.

The change would affect all regulated power activities:
transmission, distribution, power grids on the Spanish peninsula
and its islands and subsidies for generators including
renewables.

Grid operator Red Electrica, which has recently
outperformed the European utilities' sector, would also be hit
by this measure, analysts said. Its shares ended down 3 percent
on Friday.

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